Domestic Production Activities Deduction

25Sept

SECTION 199 DEDUCTION (DPAD)

The Section 199 Domestic Production Activity Deduction (DPAD) is a substantial tax break for manufacturers and other qualifying businesses that produce most of their goods or work in the United States instead of sending that work overseas. The deduction went into effect in 2005 and applies to any sized business that manufactures, grows, extracts, produces, develops, or improves goods primarily in the United States.

THE VALUE OF DPAD

The maximum credit you can claim under the domestic production activities tax deduction is 9% of the income you earn from the business. However, as the DPAD is intended to encourage businesses to hire more employees, a business can only qualify if it has employees. Additionally, the deduction carries two significant limitations:

It cannot exceed 50% of the total wages you paid to your employees engaged in domestic production activities

It cannot exceed your corporation’s taxable income if you own a C corporation

It cannot exceed your adjusted gross income if you operate a sole proprietorship, S corporation, partnership or LLC

Examples of Benefits

$10,000 in domestic production activity income in one year

$2,000 paid in employee wages

Deduction = $900 ($10,000 X 9%)

*If employee wages were $1,000, her deduction would be limited to $500 ($1,000 x 5%)

WHO QUALIFIES?

The tax deduction is provided to businesses that undertake work in one of the following categories:

Construction performed in the United States.

Electricity, potable water or natural gas produced in the United States.

Films and videos produced at least 50% in the United States.

Architectural or engineering services performed in the United States for domestic construction projects.

The disposition of tangible personal property, sound recordings or computer software created or developed, in whole or in part, in the United States.